China will gradually implement structural deleveraging, and simultaneously adopt a macroeconomic policy and targeted measures to ensure smooth and orderly long-term deleveraging.
In the first half of the year, the growth of China’s macroeconomic leverage ratio fell further. Statistics indicated that the first quarter leverage ratio growth dropped 1.1 percent year-on-year. And the leverage structure has been optimized as well. Besides, the general leverage ratio local of government declined 0.7 percent, non-financial enterprise sector’s leverage ratio rose 0.6 percent, and the household sector’s leverage ratio increased by 1 percent.
The supply-side structural reform and the implementation of targeted macroeconomic policy are main driving forces of deleveraging. As the reform deepens, corporate profits and fiscal revenues have maintained rapid growth in the first half of the year, which helps offset existing debt.
With the implementation of steady monetary policy, China’s broad money increased 8 percent year-on-year at the end of June, 1.1 percentage points lower than that of the same period of last year, creating a suitable monetary and financial environment for stable leverage.
As local governments’ financing guarantees are further regulated, local platform companies and other soft-constrained entities have seen a significant slowdown in debt growth.
To stabilize and decrease the macroeconomic leverage ratio, China will simultaneously implement macroeconomic policy and targeted measures. The government should raise the Total Factor Productivity, establish a modern economic system, and strengthen the growth momentum by emphasizing efficiency, quality, profit, and sustainability. It will abandon the pursuit of high growth rate through leveraging.
The high level of leveraging in China is caused by the long-term effects of a series of deep-seated factors, so it is not practical to push leveraging to a reasonable level at once. Only if it is consistent with the overall arrangement of the central government, takes structural deleveraging at a measured pace as a provisional goal, and simultaneously implement macroeconomic policy and targeted measures can we ensure smooth, orderly deleveraging in the long-term.
(The author is the chief economist of China's Bank of Communications.)